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Home » Opinion » Foreign Views
Fed's unsteady hand like drunk driver's
By Joseph E. Stiglitz |
January 12, 2009, Monday
|
Print Edition
Print Edition
A CONSENSUS now exists that America's recession - already a year old - is likely to be long and deep, and that almost all countries will be affected.
I always thought that the notion that what happened in America would be decoupled from the rest of the world was a myth. Events are showing that to be so.
Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus program.
This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.
The US Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends ?? by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse.
It's not surprising that those who helped create the problems and didn't see the disaster coming have not done a masterly job in dealing with it.
By now, the dynamics of the downturn are set, and things will get worse before they get better.
In some ways, the Fed resembles a drunk driver who, suddenly realizing that he is heading off the road, starts careening from side to side.
The response to the lack of liquidity is ever more liquidity.
When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system?
Will America face a bout of inflation?
Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud?
Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.
Still, I am not sure that there is sufficient appreciation of some of the underlying problems facing the global economy, without which the current global recession is unlikely to give way to robust growth ?? no matter how good a job the Fed does.
For a long time, the US has played an important role in keeping the global economy going.
America's profligacy ?? the fact that the world's richest country could not live within its means ?? was often criticized.
But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.
In the past, developing countries filled this role, running trade and fiscal deficits.
But they paid a high price, and fiscal responsibility and conservative monetary policies are now the fashion.
America's government will, for a time, partly make up for the increasing savings of US consumers.
But if America's consumers go from their near-zero savings to a modest 4 percent or 5 percent of GDP, then the depressing effect on demand (in addition to that resulting from declines in investment, exports, and state and local government expenditures) will not be fully offset by even the largest government expenditure programs.
We need not just temporary stimuli, but longer-term solutions.
(The author is professor of economics at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2009. www.project-syndicate.org.)
I always thought that the notion that what happened in America would be decoupled from the rest of the world was a myth. Events are showing that to be so.
Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus program.
This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.
The US Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends ?? by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse.
It's not surprising that those who helped create the problems and didn't see the disaster coming have not done a masterly job in dealing with it.
By now, the dynamics of the downturn are set, and things will get worse before they get better.
In some ways, the Fed resembles a drunk driver who, suddenly realizing that he is heading off the road, starts careening from side to side.
The response to the lack of liquidity is ever more liquidity.
When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system?
Will America face a bout of inflation?
Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud?
Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.
Still, I am not sure that there is sufficient appreciation of some of the underlying problems facing the global economy, without which the current global recession is unlikely to give way to robust growth ?? no matter how good a job the Fed does.
For a long time, the US has played an important role in keeping the global economy going.
America's profligacy ?? the fact that the world's richest country could not live within its means ?? was often criticized.
But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.
In the past, developing countries filled this role, running trade and fiscal deficits.
But they paid a high price, and fiscal responsibility and conservative monetary policies are now the fashion.
America's government will, for a time, partly make up for the increasing savings of US consumers.
But if America's consumers go from their near-zero savings to a modest 4 percent or 5 percent of GDP, then the depressing effect on demand (in addition to that resulting from declines in investment, exports, and state and local government expenditures) will not be fully offset by even the largest government expenditure programs.
We need not just temporary stimuli, but longer-term solutions.
(The author is professor of economics at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2009. www.project-syndicate.org.)
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